Forensic Audit of an Infrastructure and Civil Construction Borrower

When mobilisation advances, subcontractor payments and work in progress can all legitimately absorb funds, how do you establish which movements were real?

Construction accounts are structurally the hardest class of forensic work in India. Percentage of completion accounting means reported revenue rests on judgment rather than invoicing. Mobilisation advances move large sums early, before there is anything to inspect. Subcontracting layers place three or four entities between the borrower and the work actually performed. Each of these is a legitimate feature of how the sector operates, and each provides cover for movement that is not what it appears to be. The examination therefore could not rely on document sufficiency. It relied on establishing whether the entities receiving project funds had the capacity to perform the work attributed to them, and on tracing what happened to those funds after receipt.

Four workstreams carried the examination, structured so that each tested the explanations produced by the others.

Disbursements were traced to the project accounts for which they were sanctioned, and application tested against project requirements at the relevant stage of execution. Cross-project application was identified and quantified, because it converts a project-financed exposure into an unsecured group exposure without the lender being informed. Material subcontractors were tested for capacity: incorporation history, filed financials, employee and equipment indicators, registration status, and whether the entity transacted with anyone other than the borrower group. Mobilisation advances were traced from release through onward movement, past the first recipient, since advances are released against guarantees rather than progress, making them the earliest opportunity for value to leave a project. Fund movement between the borrower, group entities and counterparties was reconstructed to identify circularity, which is invisible at transaction level and becomes apparent only when the chain is assembled and timing compared.

Three disciplines separated this engagement from forensic work that lenders discount.

First, substance before value. Establishing who the counterparties actually were preceded analysis of how much they were paid. In construction, a modest payment to an entity that cannot have performed the work is more probative than a large payment to one that plainly did.

Second, tracing past the first leg. The first movement of funds is nearly always documented correctly, because it is the one that gets inspected. Findings in this sector come from the second and third legs, and reaching them requires reconstructing the chain rather than sampling it.

Third, sector literacy. Mobilisation advances, retention, work in progress and percentage of completion are legitimate mechanics, not red flags in themselves. Treating them as suspicious produces reports that lenders discount. The examination distinguished the mechanics from their misuse.

Project-financed exposure where funds may have been applied outside the sanctioned project. Subcontractors that appear only in the borrower's records and transact with no one else. Mobilisation advances released against guarantees where subsequent progress is not evident. Group structures where projects, sponsors and contracting entities are separately held. Work in progress or retention balances that have grown without corresponding execution. Stress in a construction account where it is unclear whether the cause is sectoral or internal. A consortium requiring an evidenced position before a classification decision.